Delrahim explained that effective antitrust enforcement lessens the need for market regulations and that behavioral commitments imposing restrictions on the conduct of the merged firm represents a form of government regulation and oversight on what should preferably be a free market.

Criticizing the early Obama administration for entering into several behavioral consent decrees that allowed illegal vertical mergers such as Comcast/NBCU, Google/ITA, and LiveNation/TicketMaster to proceed, Delrahim said there is bipartisan agreement that behavioral conditions have been inadequate. He shares the same skepticism that John Kwoka, a law professor and economist who previously served in various capacities at the Federal Trade Commission, Antitrust Division, and Federal Communications Commission, and American Antitrust Institute (AAI) President Diana Moss have about using regulatory solutions to address antitrust violations.  Specifically, Delrahim agrees with them that “allowing the merger and then requiring the merged firm to ignore the incentives inherent in its integrated structure is both paradoxical and likely difficult to achieve.”

In Delrahim’s words, “behavioral remedies are the wolf of regulation dressed in the sheep’s clothing of a behavioral decree.”  He identified several practical problems with behavioral conditions, namely:

• They are difficult to structure and negotiate.
• The mere existence of agreed upon arbitrators interfere with the competitive process of negotiating contracts.
• It is difficult to determine their expiration periods. Short remedies may be mere “Band-Aids” and not a fix, while long remedies make the DOJ a full-time regulator.
• They are unduly burdensome for the merged firm and the DOJ because they require monitoring the merged firm’s day-to-day operations.
• And they are challenging to enforce – especially the granular commitments of discrimination and information firewalls – because the DOJ often lacks the resources to do so effectively.

Delrahim then praised the later Obama administration’s efforts to block Comcast’s acquisition of Time Warner Cable and Lam Research’s acquisition of KLA-Tencor rather than impose ineffective behavioral remedies.  Both those deals were abandoned in the face of pressure from the DOJ.

Because he is skeptical that behavioral remedies can be effective, Delrahim said that under his leadership, the Antitrust Division will cut back on the 1300 behavioral consent decrees that are currently in place and focus, instead, on structural remedies to resolve antitrust concerns presented by mergers. He referred to the DOJ’s 2004 Remedies Guidelines, a report that states “conduct remedies generally are not favored in merger cases”.

Nevertheless, Delrahim left open the possibility that the DOJ may accept behavioral commitments in certain circumstances.  He noted that it would be a high standard to meet but that such commitments may be accepted when the DOJ has a “high degree of confidence that the remedy does not usurp regulatory functions for law enforcement.”  Delrahim said that behavioral remedies should avoid taking pricing decisions away from markets and should be simple enough so that the DOJ can oversee them. He further explained that behavioral remedies must completely cure the anticompetitive harms.  This line of thinking is consistent with his friend, former Antitrust Division chief Bill Baer who said that “consumers should not have to bear the risks that a complex settlement may not succeed.”

Finally, Delrahim underlined that if a merger is illegal and a proposed remedy does not resolve the competitive problem, the deal should be blocked and, conversely, if a merger does not raise competitive concerns, the DOJ will no longer accept a behavioral remedy just because it is offered.

Lessons Learned: According to Makan Delrahim, the Antitrust Division will cut back on behavioral commitments in consent orders that regulate conduct.  Instead, the Division will rely more on structural remedies such as divestitures to resolve anticompetitive concerns with mergers.  He made some good points with respect to the adequacy and effectiveness of behavioral remedies, which are difficult to structure and police.  On the surface, this policy announcement is not much different from current and past antitrust thinking.  Delrahim is simply making clear where he stands on the issue.  Divestitures of a business or a product line have always been the preferred remedy for any merger, be it horizontal or vertical.  However, the antitrust agencies have typically used behavioral remedies to resolve antitrust concerns presented by vertical mergers that result in efficiencies in order to retain the procompetitive benefits of the transaction.  But, it has never been the Division’s policy that conduct remedies will always be available and sufficient to resolve vertical antitrust concerns.  And while he acknowledges that behavioral remedies may be adequate where the Division has a high degree of confidence that the remedies can be effective, Delrahim is clearly signaling a far more restrained application of such commitments.  In fact, even under Obama the DOJ forced parties to vertical mergers to abandon their deals when the Division could not negotiate structural and/or behavioral remedies to resolve the anticompetitive concerns.  For instance, in 2016, the DOJ forced Lam Research and KLA-Tencor to abandon their vertical merger when it became clear that behavioral commitments were not sufficient.  In sum, Delrahim’s policy stance signals that he will continue to take an aggressive approach on how the DOJ resolves anticompetitive concerns presented by vertical mergers.  In particular, he seems especially unenthusiastic about behavioral remedies.  The DOJ’s recent lawsuit to challenge AT&T Inc.’s acquisition of Time Warner Inc. suggests Delrahim has the courage of his convictions.  How that deal plays out in court – or out of it – may well set the stage for the enforcement of vertical mergers in the foreseeable future.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

While the cases are substantially different, both complaints contain some similar allegations.  Both complaints describe the proposed mergers as consolidation of the “big five” insurers to the “big three, each of which would have almost twice the revenue of the next largest insurer.”   Taken together, they would cut the number of major health insurers from five to three, with UnitedHealth Group Incorporated (“UnitedHealth”) being the only other remaining large player.  Both complaints say the mergers will harm competition by “eliminating two innovative competitors – Humana and Cigna – at a time when the industry is experimenting with new ways to lower healthcare costs.”  Both complaints allege that the mergers will restrain competition in the sale of individual policies on the public insurance exchanges.

However, the cases are different in that they focus on different product and geographic markets and that the Anthem/Cigna complaint contains a monopsony claim while the Aetna/Humana complaint does not.  The Anthem/Cigna complaint alleges that that merger will restrain competition in the “purchase of healthcare services by commercial health insurers,” as well as the sale of commercial health insurance to national accounts and large-group employers, and the sale of individual policies on the public insurance exchanges.  The Anthem/Cigna complaint also includes an allegation that the merger would substantially increase Anthem’s ability to dictate the reimbursement rates it pays hospitals, doctors, and healthcare providers, threatening the availability and quality of medical care.  The DOJ alleges that Anthem already has bargaining leverage over healthcare providers and this acquisition would make the situation worse in 35 metropolitan areas.  This is otherwise known as a monopsony theory.   The Aetna/Humana complaint alleges anticompetitive effects only in the sale of Medicare Advantage policies to individual seniors and the sale of individual polices on the public exchanges.   The Aetna complaint does not charge a violation in the market for the purchase of healthcare services, and therefore does not rely on a monopsony theory.  Even where the complaints overlap with respect to product market as is the case with the sale of individual policies on the public insurance exchanges, the geographic markets are different.

So while the headlines state that the heath insurance mergers reduce competition from five large insurers to three insurers, the cases against Anthem and Aetna are substantially different.  Therefore, there will be two separate trials; the DOJ will have two separate litigation teams to prosecute the cases; and Anthem and Aetna will each have its own defenses and arguments in support of its merger.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

DOJ’s Vertical Concerns Related to the Creation of New Charter

New Charter became the second largest cable company and third largest Multichannel Video Programming Distributor (“MVPD”).  MVPDs include cable companies such as Comcast, TWC and Charter, but also direct broadcast satellite providers (i.e., DirectTV and Dish Network) and telephone companies like AT&T and Verizon.

According to the DOJ, prior to the merger, TWC, the second largest cable company and fourth largest MVPD, already had substantial power over programmers’ content.  The DOJ alleged that TWC used this power to influence programmers’ behavior towards its smaller online video distributors (“OVD”) rivals such as Hulu, Netflix and Amazon.  The DOJ further alleged that TWC was the most aggressive cable company or MVPD in terms of obtaining Alternative Distribution Means (“ADM”) clauses in its contracts with programmers that prohibited or greatly restricted programmers from distributing their content to OVDs or through online distribution.  Indeed, the DOJ specifically alleged in its Complaint that “[n]o [cable company] has sought and obtained these restrictive ADMs as frequently, or as successfully, as TWC.”

In the Complaint, the DOJ expressed the following concern:

In order for an OVD [Netflix] to successfully compete with the traditional [cable companies], it needs both the ability to reach consumers over the Internet and the ability to obtain programming from content providers that consumers will want to watch. Importantly, incumbent cable companies often can exert significant influence over one or both of these essential ingredients to an OVD’s success, because they provide broadband connectivity that OVDs need to reach consumers and are also a critical distribution channel for the same video programmers that supply OVDs with video content.  To the extent a transaction, such as the one at issue here, enhances an MVPD’s ability or incentive to restrain OVDs’ access to either of these critical inputs, and thus to prevent OVDs from becoming a meaningful new competitive option, consumers lose.

Acknowledging that no horizontal overlap existed between the merging parties in any local market, the DOJ noted in its Competitive Impact Statement that “the Clayton Act is concerned with mergers that threaten to reduce the number of quality choices available to consumers by increasing the merging parties’ incentive or ability to engage in conduct that would foreclose competition.”  Accordingly, the DOJ sought comprehensive behavioral relief to ensure that New Charter will not have the ability to foreclose OVD competition and deny customers the benefit of innovation and new services through ADM clauses and other restrictive contracting provisions.

Indeed, the DOJ required conditions to resolve its vertical foreclosure concern that New Charter would have a greater incentive and ability to impose contractual restrictions on video programmers (producers of TV shows and video content), thereby limiting their ability to distribute their content through OVDs.

The New Charter Remedies

The conditions that the DOJ negotiated with New Charter are entirely behavioral in nature.  The remedies restrict New Charter’s post-merger conduct in the following ways:

1. New Charter is prohibited from entering into or enforcing agreements with programmers that limit, or forbid, OVDs’ access to video content.
2. New Charter is prohibited from entering into agreements that create incentives for video programmers to limit access of programming to OVDs.
3. New Charter is prohibited from discriminating against, retaliating against, or punishing any video programmer for providing its content to any video distributor.
4. New Charter is prohibited from entering into or enforcing agreements with programmers that make it financially unattractive for programmers to license their content to OVDs.  In other words, New Charter is not permitted to enter or enforce an agreement whereby the programmer is obligated to provide New Charter with a massive discount if the programmer provides content to an OVD.
5. New Charter is prohibited from entering into or enforcing unconditional most favored nation provisions (“MFNs”) against a programmer for licensing their content to OVDs.

In sum, the conditions contain broad prohibitions on restrictive contracting practices to ensure that New Charter will not replace ADMs with other contracting practices that would increase barriers for OVDs or otherwise make OVDs less competitive.  Indeed, the prohibitions were put in place because the DOJ was concerned that New Charter could enter into certain contracts that are designed to circumvent the Order, create incentives to limit distribution to OVDs, or create economic disadvantages for a programmer to license content to an OVD.

Lessons Learned

While the DOJ normally prefers structural remedies when approving a merger that raises only horizontal concerns, the DOJ’s negotiated consent decree with Charter illustrates the DOJ’s willingness to impose behavioral conditions on mergers that raise vertical foreclosure concerns.  Despite no geographic overlap in any local market, the DOJ required comprehensive behavioral conditions to prevent New Charter from engaging in future anticompetitive conduct against its smaller rivals.  The behavioral remedies used to resolve the vertical foreclosure concerns raised by the creation of New Charter are applicable to any industry with a multi-tier supply chain and dominant firms that already exert power over other tiers of the supply chain.  The DOJ’s goal in New Charter is to prevent the merged firm from raising barriers to entry for smaller horizontal rivals or otherwise make smaller horizontal rivals less competitive.  The DOJ is concerned when a merger enhances the merged firm’s incentive and ability to protect its market power by denying or raising the costs of an input to its rivals.  In other words, the DOJ is concerned about transactions that substantially enhance the merged firm’s ability and incentive to foreclose competition through restrictive contracting provisions or incentive programs that make it economically unattractive to work with the merged firm’s rivals.  The DOJ’s behavioral conditions are aimed at protecting competition and consumer choice.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com